Overview of Logistics Costs in eCommerce
Reducing costs is and always will be a priority of ecommerce businesses. This is to be expected given that ecommerce businesses face logistics costs between 5% and 15% of total costs while ordinary retail stores only face logistics costs under 5%.
So managing expenditure spent on logistics can go a long way in improving profitability. But low costs can’t be at the expense of quality services. This is where it becomes important to be aware of what types of costs you may incur, both normal and hidden costs. You can determine the most efficient ways to negotiate and cut down prices by preemptively determining what goes into calculating overall shipping rates. The idea is, you only spend on what your needs demand you spend on and nothing more.
List of Top 10 Different Types of eCommerce Logistics Cost
Keeping your business priorities and the services you need in mind, these are the 11 different types of logistics costs that you might face.
1. Fuel surcharges
Fuel surcharges are an extra operational fee that logistics and trucking companies levy on their ecommerce enterprise customers to cover fluctuating fuel costs. They are typically calculated at a base rate decided by logistics partners so you can leverage your freight volumes to negotiate an index within which these rates must be calculated. That way you don't find yourself unexpectedly facing a heavy fuel surcharge.
2. Handling fees
Handling fees are another sudden charge that can pop up at different rates depending on your logistics partner. These fees cover the costs of actually preparing and moving the goods during the process of transportation that are not covered by the shipping rate, like picking up and processing the order. Pre-determining this amount or the rate at which it can be calculated during negotiations can help keep these fees low.
3. Packaging charges
Packaging charges, as the name suggests, refer to the costs involved in packing the item and sufficiently preparing it for transportation and delivery. Many logistics companies include packaging costs within handling fees.
However, not all do, which is why it's important to understand prior to selecting the best shipping aggregator where and how these charges may be levied. Some logistics service providers offer options for customized or weather-resistant packaging like Blue Dart. These may result in additional charges being levied beyond the ordinary packaging charges.
4. Labour costs
Labour costs can arise throughout all the different stages of delivery. This includes warehousing, inventory assessments, packaging, pickup, and transportation. However, a majority of eCommerce logistics companies limit these costs to those accrued during warehouse operations. In both cases, understanding how the warehouse operates and how transportation is carried out can help you streamline activities and reduce labour costs.
5. Restocking fees
When a customer decides to return an item, that item has to be restocked in the inventory and made ready for resale. Any eCommerce business that relies on a logistics partner for inventory and storage will have to face the costs of this activity. Some e-commerce businesses combat this cost by giving customers a partial refund of returned items, withholding a standard amount to cover the restocking fee.
6. Security or insurance
While security and insurance for orders being shipped is a logistics service that every eCommerce business can benefit from, it is not a priority for every business. Online businesses and retailers for high-value products, heavyweight products, fragile products and other kinds of products with specialized needs require either secured transit or insurance and sometimes both. Keeping this in mind, you can select the best eCommerce logistics partner that offers these services freely or pre-negotiate the costs for the same.
8. COD handling
It is a fact that a majority of Indian online shoppers primarily prefer using COD (cash-on-delivery) services when ordering from eCommerce businesses. However, many logistics partners still charge for COD handling, i.e., for the process of collecting the payment, handing over the item and then verifying proof of delivery to the ecommerce enterprise. Some may only charge if the number of COD orders goes beyond a specified limiting. Delineate these numbers beforehand in accordance with the volume of COD orders you receive.
9. NDR management
NDRs (non-delivery reports) can heavily increase your costs if they are not well-managed. NDRs are what first failed delivery attempts are notified as, and if the cause for the failed attempt is not determined, the order is likely to be cancelled or future delivery attempts will also consequently fail. This brings up your RTO numbers, which is essentially double the cost for you, as you’ll not only be losing the price of the order from the customer but shipping charges will still be applicable.
10. Reverse logistics costs
Reverse logistics involves a plethora of different types of costs, from labor to shipping and then warehousing and restocking. This is another place where RTOs can end up increasing your costs as orders go through the backwards journey to their original warehouse. To keep these costs down, the simplest solution is to work with your logistics partner to actively keep RTOs down, or contractually share the burden of these costs.
11. Government or customs fees
Government and customs fees are unfortunately unavoidable for the most part, but some can be reduced through careful planning. Many logistics companies like FedEx are global carriers, equipped to aid ecommerce businesses in getting past customs clearances and government-mandated processes.
12. Value-added taxes
Much like government-levied fees, value-added taxes cannot be avoided. These are the taxes calculated based on the rising value of a product as it goes through the various stages of the supply chain.
How to Manage and Reduce eCommerce Logistics Costs
The only way to truly maximize your profitability is to manage and reduce your spending when it comes to logistics costs. When you’re able to bring your logistics costs down, you can make your customers infinitely happier by offering them cheaper shipping options or even free shipping options.
In fact, the manner in which you levy shipping fees can also help you to manage your spending and reduce logistics costs. There are a multitude of other ways that can also be effective in bringing the cost of logistics and transportation down. Any of the methods listed below, if carefully implemented, could drastically reduce the amount you spend on logistics.
1. Use Third Party Logistics Companies
First things first, always delegate. Outsourcing is such an important part of how businesses function, they even made a sitcom about it. When it comes to logistics, you can rely on a multitude of third-party logistics companies to cater to a wide variety of needs. This saves you the money and hassle of having to set up an internal logistics infrastructure.
Some 3rd Party logistics companies handle warehousing, while others deal with inventory management. The most important third-party logistics companies for any ecommerce business are carriers, as they are responsible for the delivery performance and final customer experience.
2. Optimise Storage and Purchasing Options
Information is power. Tracking your sales data over various periods of time is the perfect way to understand how you can optimise your storage facilities and purchasing options for customers. Take a good long look at which products are most favored by your customers as well as which items need more frequent restocking.
You can also minimise stock for items that aren’t big-sellers. Essentially, you can break down and categorize your items based on their returns. With this information, you can create the optimal system for storage and pricing.
3. Buy Packaging in Bulk
This one seems simple and straightforward but requires an equally high level of strategic planning as optimising storage. Instead of paying nickel and dime rates for packaging, it is more advisable to go for bulk purchases.
You should calculate the amount you need in accordance with the average order weight and dimensions. You can save a lot of money in the long run by purchasing high volumes of boxes and packing supplies. The initial cost paid may be on the higher side but your average cost-per-order can be reduced significantly.
4. Wide Distribution of Inventory
Different shipping zones may have varied rates for shipping depending on the location of the final destination. And shipping from a singular location will result in a heavy mix of nearby and far-away delivery destinations.
If you set up storage facilities and warehouses in different locations near major delivery zones, you can cut down on the extreme costs and make use of the varied pricing options. You can also use different modes of transportation to reduce shipping costs, i.e, by opting for road services instead of air services. This is most effective only with ecommerce businesses dealing with high volumes of goods.
5. Choose Carriers Carefully
Carriers have an unbelievably large role to play in the outcome of every order placed and the amount you will be spending on each order. A majority of the money spent to deliver each order is most likely to go to carriers as they are responsible for the actual delivery of these items. So you would want a carrier that provides a variety of delivery options, offers services for added safety and security, and you may even require specialised services.
There are 2 things you need to keep in mind when dealing with carriers. The first is that the best way to get a good deal with a carrier is to have a shipping strategy in mind that projects your growth and allows you to use that to negotiate better rates. The second thing to remember is that carrier prices tend to be updated annually so you have an opportunity on a yearly basis to reassess your shipping strategy and approach carriers for better rates.
6. Lower Cart Abandonments
This may seem counterintuitive but sometimes, it can be helpful to reduce the shipping fees charged to customers and even offer them free shipping. While this puts a heavier burden on you, it reduces the likelihood of the cart being abandoned at the processing and checkout page.
It's also important to see what your other options are with respect to charging shipping costs. For example, you might be able to offer extremely affordable next-day or even same-day shipping, which makes customers more inclined to make the purchase despite the added shipping fee.
7. Reorganize Your Supply Chain
Much like in life, it's always good to set out a time to take stock of everything you have. And then make changes to make it fit just right. This will allow you to rearrange your supply chain operations in a more efficient way. You would need to ensure that all warehousing space is being properly utilized.
Inventory and pickup can be made a coordinated effort so that pickers only go for inventory closest to them. Make sure your inventory is being properly tracked and packed, for which setting up a packing station always helps. Have a thorough understanding of the entirety of the activities that need to be covered during these processes, how much time they take, and the best way to fit them ineffectively.
8. Make Average Order Values Higher
This is a pretty simple way of simply increasing your revenue while also reducing cart abandonment rates. Place a certain minimum order value for checkouts which enables customers to access interesting benefits like free shipping or faster shipping.
People are typically itchy to shop when they’re shopping on ecommerce platforms. So showing them that there is an added benefit to making another purchase is likely to give them the push they need to do so. By adding that one more item to their cart, they save on shipping while you get a little closer to your dream profit margin. That’s called a win-win situation.
9. Find Nearby Suppliers
We’ve covered warehousing, inventory management, packaging needs, shipping requirements, and even customer offerings as tools that can help bring down your shipping costs. But going back to the beginning of the cycle, the cost of moving items from your supplier's location to these varieties of distributors can in and of itself be a high cost you face.
The best way to combat this is to make sure that you have a streamlined transportation system between your supplier and initial storage facility. But this is only effective when you have ensured that the supplier is nearby to the facility. A far away supplier not only leads to higher transportation costs but also increases the possibility of stock getting damaged or lost along the way.
10. Make Proper Use of technology
This is one of the major benefits of modern logistics and what we can confidently describe as the “e-commerce era”. We have technology coming out of the wazoo. In nearly every field imaginable within the industry of logistics itself, there are technological solutions that can help take your services to the next level, pushing profitability upwards while costs remain largely the same in comparison.
Automate shipping operations to truly see efficiency play out between order placement, packing and actual delivery. By automating functions in your supply chain, you get greater visibility as well as the opportunity to perfect your business and shipping model.
Final Conclusive Words
There are numerous different costs your ecommerce business will face when it comes to eCommerce logistics solutions. While a few of them are unavoidable and non-negotiable, the bulk of them can be managed and reduced through strategic management and careful planning.
Being aware of the types of costs and how they are calculated can go a long way in getting you the most cost-effective deal with each logistics partner. If you remain updated on each logistics partners’ performance and costs, you can stay one step ahead of the game at all times.